At the end of its two-day policy meeting, the Federal Open Market Committee raised its target range for the federal funds rate to 2.25% to 2.50%. In a statement accompanying the announcement, the FOMC said it “expects that continued increases in the target range will be appropriate.” The decision, which had unanimous support, extended a series of interest rate hikes that began in March and have increased in size as the Fed’s battle to fight inflation intensifies. The rate hike means the Fed is in the midst of its most aggressive monetary tightening cycle since 1981. It follows a half-point rate hike in May and a 0.75 percentage point increase last month — the first of that size since 1994 . The new target range is now close to what most officials see as the “neutral rate” that neither stimulates nor constrains growth if inflation is at the 2 percent target. With inflation running at its fastest pace in more than four decades, further rate hikes are expected in the second half of 2022, but the pace of those hikes is hotly debated. Economists are divided on whether the central bank will implement another rate hike of 0.75 percentage points at its next meeting in September or opt for a smaller hike of half a point. On Wednesday, the Fed acknowledged early signs that the economy is beginning to slow, but showed little sign of wavering from its “unconditional commitment” to restoring price stability. In its statement, the central bank revised its assessment of the economy, noting that “recent indicators of spending and output have softened,” a more negative outlook than last month, when it said “economic activity is emerging[ed] to have collected”. Senior officials have previously said that failing to get inflation under control and allowing it to “consolidate” would be a worse outcome than moving too aggressively. The federal funds rate is projected to reach around 3.5 percent this year, a level that will more actively curb economic activity. Most officials believe that policy should become “tight” in order to reduce demand to a level where price increases are limited. Officials have previously pointed out that there must be “clear and convincing” evidence that inflation is beginning to slow before the Fed relaxes its efforts to tighten monetary policy. Central bank policymakers want to see a series of slowing monthly inflation readings, but economists warn that may not happen for months, at least for “core” readings that strip out volatile items such as food and energy.

In June, core goods and services registered an alarming 0.7% jump, leading to a sharp rise in rent and other housing-related costs and other expenses that are likely to remain high through the fall. The Fed raised interest rates just a day before the release of gross domestic product data, which could point to a second straight quarter of shrinking economic growth. That would meet one of the common criteria for a technical recession, but officials have pointed to other signs of economic strength — including a strong labor market — to cast doubt on that proposition. The conflicting economic data will make the Fed’s job more difficult as it plans subsequent policy actions, while increasing pressure on the central bank to slow the pace of rate hikes soon. Officials still maintain that inflation can fall to the Fed’s 2 percent target without excessive job losses, though they have acknowledged that the path to that result has narrowed. Markets moved little in response to the statement, suggesting the 0.75 percentage point increase was fully expected by investors. A slight rise in the two-year yield pushed the spread between two- and 10-year yields further into negative territory, to its lowest level since 2000. The two-year yield moves with interest rate expectations and the 10-year moves with expectations of economic growth. Ashish Shah, chief investment officer at Goldman Sachs Asset Management, said: “This was an expected number. A lot of the drama is out at this stage. We have passed the peak of aggression.” “The Fed is benefiting from being so verbally aggressive[in signalling future rate rises]. . . They were able to quickly tighten economic conditions before the real tightening and we are seeing the results of that,” he added. James Knightley, chief international economist at ING, said: “Inflation remains the Fed’s number one priority and they are willing to sacrifice growth to achieve it.” “Rate cuts are firmly on the cards for next year. Two, 10-year yield curve inverts to multi-year lows. It will be difficult to avoid a full-blown recession,” he added. Additional reporting by Kate Duguid